Why do multinationals pay women less in developing countries?

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This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Niccolò Pisani, Assistant Professor of International Management, University of Amsterdam, The Netherlands & Ans Kolk, Professor, University of Amsterdam, The Netherlands & Khadija van der Straaten, Lecturer, Rotterdam Business School

• The gender wage gap remains at the centre of efforts to achieve gender parity.

• Multinational companies play a crucial role in setting pay differentials.

• Unlike in developed countries, women working for multinationals in developing ones are paid more poorly compared to domestic firms.

Gender inequality is one of today’s greatest social injustices, with the world still nearly century off parity between the sexes, according to the World Economic Forum’s Global Gender Gap Report 2020. Melinda Gates recently pledged $1 billion to promote gender equality, the topic of her 2019 book. Interestingly, Gates and her team have emphasized that to make a real impact, the primary focus should be on the barriers faced by women at work and the responsibility of business for realizing gender equality.

A crucial aspect of this battle is the gender wage gap – included in the Sustainable Development Goals’ target 8.5 “equal pay for work of equal value”. Worldwide, women earn on average around 20% less than men for equally valuable work. Major variations exist across countries and regions – the gender wage gap ranges from 3% in Luxembourg to a staggering 37% in South Korea – no country in the world has yet achieved income parity.

Closing the wage gap is therefore crucial for reducing global gender inequality and achieving sustainable development for societies at large. Firms play a decisive role in these aspirations. As the economic agents providing employment, they directly determine hiring and promotion policies and ultimately payment differentials.

With globalization increasingly under scrutiny, there is mounting attention on the effects multinational firms have in the local economies where they operate. Thus, in our recent study, we examined the gender wage gap in multinationals and compared it with the gap in domestic firms to assess whether multinationals are doing any better at tackling this social inequality. We wanted to provide an answer to the following key question: Are women better off working for multinationals when it comes to wages?

Using comprehensive micro-level data from over 40,000 employees in 13 countries, we found that the gender wage gap is smaller in multinationals than in domestic firms, but only in developed countries. Contrary to our expectations, the gender wage gap turns out to be even larger in multinationals than in domestic firms in developing countries. Specifically, our results show that the gender wage gap is 25% larger in domestic firms than in multinationals in developed countries: -$2.78 vs. -$2.23 (in gross hourly wage at purchasing power parity). However, in developing countries, we obtained the opposite result; the (substantially) larger gender wage gap is found in multinationals and not in domestic firms (-$2.53 vs. -$1.20). The magnitude of the difference obtained is staggering in developing countries: 110% larger in multinationals than in domestic firms.

Our results suggest that further careful evaluation of the consequences of multinationals’ activities across borders seems to be in order. On the one hand, our study shows a smaller gender wage gap in multinationals compared with domestic firms in developed countries. This is a likely consequence of multinationals’ highly formalized international human resources management systems and, especially, greater attention to their role and reputation as good “global citizens” in such countries.

On the other hand, in developing countries multinationals are found to be associated with an even larger gender wage gap than domestic firms. One possible explanation may be that, with the dominant presence of developed-country investors and board members, global human resources management systems primarily adopted by multinationals have converged towards developed-country standards that consider female life patterns in developed countries as broadly applicable across regions: for instance in relation to pregnancy leaves and child care-permissions.

However, on other aspects, which are less related to formalized rights and more to (culturally based) perceptions of the role of women in the family and in society, substantial differences exist across countries. Examples might be diverging expectations on the role of women in taking care of elderly parents, or limitations in traveling or moving internationally, a particularly relevant aspect when working for a multinational. Thus, while in a developed country setting increasing standardization of human resources management systems in multinationals seem to have contributed to reducing the gap between women and men, our findings suggest that such convergence has worked out differently, or not at all, in other contexts.

Our study calls for a profound reflection on multinationals’ influence on local economies. The results obtained show that these effects are not always positive; most notably, that multinationals contribute to widening instead of reducing the gender wage gap in developing countries. Multinationals have a decisive role to play here. Demonstrating that they are tackling this issue not only in developed countries but also – and especially – in developing regions should become a key priority in their leaders’ agenda.